Gold Tarnishes as U.S. Economy Strengthens

Price Drop of 2.4% Is Biggest Daily Decline in Over a Year; Traders Backpedal as Fed Stands Pat on Rate-Increase Timing

Molten gold is poured into an ingot mold at a plant in Vienna. Prices for gold and other precious metals had been climbing until recently.
Photo:
Bloomberg News

By

Ira Iosebashvili

Jan. 29, 2015 8:36 pm ET

The strong U.S. economy is dimming gold’s allure.

Gold futures posted their sharpest decline—2.4%—in more than a year, a day after the Federal Reserve waxed optimistic about U.S. economic growth and signaled that a rate increase later this year remains on the table.

Prices for gold and other precious metals had been climbing until recently, as rising concerns about the health of the global economy drove investors to safe-seeming assets. Some investors became convinced that flagging global growth would delay the Fed’s first rate increase since 2006.

Now, investors are starting to believe the pace of rate increases will largely depend on U.S. economic data, which has shown steady growth in recent months. That has dented the case for owning precious metals. The Fed’s unwavering stance on interest rates pushed the dollar to fresh multiyear highs against other currencies, weighing on gold, which is priced in dollars and becomes more expensive to foreign buyers when the U.S. currency rises. A potential rate increase also hurts gold, which pays its holders no dividend and struggles to compete with yield-bearing investments when rates rise.

“Gold investors have had an unpleasant awakening,” said
George Gero,
a senior vice president with RBC Capital Markets Global Futures. “The digestion of Wednesday’s statement tells you the Fed will be data-driven, and that helps the hawkish cause.”

Even so, precious metals remain among the best-performing assets in 2015. Gold prices are up 6.1% this year, while silver is up 7.5%. Both are up more than any other commodities in the Bloomberg Commodity Index, as well as U.S. Treasurys, which have returned 2.3% in 2015, according to
Barclays
PLC data. The S&P 500 stock index is down 1.8%.

Gold for April delivery, the most actively traded contract, closed down $31.30 at $1,255.90 a troy ounce on the Comex division of the New York Mercantile Exchange, the sharpest decline since December 2013, according to FactSet. Silver for March delivery fell $1.315, or 7.3%, to $16.773 an ounce, its biggest fall since June 2013.

Exchange operator CME Group Inc. raised margins on silver futures, effective after the close of business Friday. Investors now will have to put up $7,920 a contract for delivery within the next four months when putting on new bets, an 11% increase.
Michael Mullaney,
who oversees $16 billion at Fiduciary Trust, said he was preparing to add to his fund’s gold position earlier this month but is now reconsidering those plans.

Until Wednesday, the case for gold seemed clear, he said. Oil prices were on their way to five-year lows, as demand remained weak amid reports of ever-increasing stockpiles. The World Bank and International Monetary Fund both cut their forecasts for global growth this year. Last week, the European Central Bank launched an unprecedented economic-stimulus program, sending investors to gold as the euro slid.

But Mr. Mullaney said he changed his mind when the Fed indicated it would set aside the global picture as long as the U.S. economy remained healthy. “We thought the Fed would emphasize patience more, but instead they talked about the strength of the U.S. economy,” he said. “Now, we’re not as confident the Fed will be on the sidelines.”

Thursday’s stronger-than-expected U.S. jobs data appeared to bolster the Fed’s sunny view, pushing gold lower. A day before, the Fed acknowledged the labor market’s progress, which the central bank is watching closely as it weighs when to lift short-term interest rates.

On Friday, the Commerce Department will release fourth-quarter gross domestic product, offering the market its first reading on how fast the economy grew in the full year.

“As bad as things are...the U.S. is doing okay,” said
Ira Epstein,
a strategist at Linn Group. “The market looked at that and said ‘why are we buying gold?’ ”

Still, some market watchers are hesitant to write off gold. Many expect the euro and yen to fall further. Unexpected jolts to the currency market, including the
Swiss National Bank
lifting its cap on the franc, has reminded investors that it pays to be cautious, said
Edward Meir,
a strategist at INTL FCStone.

“There’s always the possibility that something can come out of nowhere,” Mr. Meir said.